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Maximizing Retirement Income: IRAs, Pensions & Annuities Guide

Discover strategies for managing various retirement income sources, including IRAs, pensions, and annuities. Learn about different IRA types and distribution methods to optimize your retirement savings. Get insights on how to interpret Form 1099-R and make informed decisions to secure your financial future.

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Maximizing Retirement Income: IRAs, Pensions & Annuities Guide

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  1. Retirement Income – IRAs and Pensions Pub 4491 – Page 109 Pub 4012 – Page D-18 NTTC Training 2013

  2. Types of Retirement Income • Individual Retirement Arrangement (IRA) Distributions • Pensions • Annuities • Social Security (covered in a separate lesson) NTTC Training 2013

  3. Retirement Income Reported on: • Form 1099-R – Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. • Form RRB 1099-R – Annuities or Pensions by the Railroad Retirement Board • Form CSA 1099-R – Statement of Annuity Paid (civil service retirement payments) • Form CSF 1099-R – Statement of Survivor Annuity Paid NTTC Training 2013

  4. Four Types of IRAs Pub 17 Chapter 17 • Traditional • Roth • Savings Incentive Match Plans for Employees (SIMPLE) • Simplified Employee Pension (SEP) NTTC Training 2013

  5. IRA Distributions Pub 17 Ch 17 • Regular • Rollover • Direct • Indirect (Not taxable if done right) • Minimum Distributions NTTC Training 2013

  6. Intake and Interview NTTC Training 2013

  7. Interview With 1099-R in hand – if IRA box checked: • What type of IRA? – Traditional • Did taxpayer ever make non-deductible contributions? • If early distribution, is there an exception to avoid additional tax? • If rollover was made, was it timely? • Was a qualified charitable distribution made? NTTC Training 2013

  8. 1099-RWhat is this form telling you? NTTC Training 2013

  9. Interview With 1099-R in hand – if IRA box checked: • What type of IRA? – Roth • Was any part a conversion? When? • If early distribution, is there an exception to avoid additional tax? • If rollover was made, was it timely? NTTC Training 2013

  10. Interview With 1099-R in hand – if IRA box checked: • What type of IRA? – SEP/SIMPLE • Confirm all is taxable • If early distribution, is there an exception to avoid additional tax? • If rollover was made, was it timely? NTTC Training 2013

  11. IRA Box 7 In-Scope Distribution Codes 7 Normal distribution (most common) 1 Early Withdrawal, no known exception 10% additional tax 2 Early distribution, exception applies 3 Disability 4 Death B Designated Roth account distribution G Rollover not taxable, no additional tax applies Q Qualified distribution from Roth IRA NTTC Training 2013

  12. IRA Box 7 In-Scope Distribution Codes • Possible double letter codes • Look up each letter • Example • G4 – rollover distribution to beneficiary upon death of account holder NTTC Training 2013

  13. Traditional IRA Distributions Pub 17 Ch 17 • Required Minimum Distribution (RMD) • Must take required minimum distribution – age 70½ • Must take by April 1 of year following • Can avoid two distributions taxed in one year by taking first in year turns 70½ NTTC Training 2013

  14. Traditional IRA RMD • IRA administrator will calculate RMD • Taxpayer responsible to take RMD • 50% additional tax for amount not distributed (“too late” penalty) • Can request waiver of additional tax using Form 5329 Part VIII – out of scope NTTC Training 2013

  15. Traditional IRA RMD • Can take total RMD from one account rather than from several accounts • If taxpayer is 70½ or older, confirm with taxpayer that total RMD was taken NTTC Training 2013

  16. Traditional IRA Distributions • Potential 10% additional tax for distribution prior to 59½ (“too early” penalty) • Exceptions may apply NTTC Training 2013

  17. Traditional IRA Distributions • Traditional to Roth Conversion – Code 2 • Fully taxable if no basis in Traditional IRA • No penalty • Out of scope(requires Form 8606 Part II) NTTC Training 2013

  18. Form 8606 – Part I • Running record of nondeductible contributions and remaining basis • The basis in IRA is recovered each year based on a ratio • That year’s distribution • Compared to value of all Traditional IRAs NTTC Training – 2013

  19. Form 8606 – Part I • On 1099-R, check box under line 5 of exclusion worksheet • Form 8606 appears in forms tree NTTC Training – 2013

  20. Form 8606 – Part I • Line 1 if any part of 2013 contribution is nondeductible, enter amount • Line 2 – unrecovered cost basis from previous years (from 2012 form 8606 line 14, if did not carry forward in TaxWise) NTTC Training – 2013

  21. Form 8606 – Part I • Taxpayer must provide value of all Traditional IRA accounts as of 12/31/13 • TaxWise takes taxable portion of IRA distribution to 1040 Line 15b 2013 NTTC Training – 2013

  22. Roth IRA • Contributions not deductible • Distributions tax free if conditions met • Pub 17, last page of chapter 17 • Otherwise out-of-scope NTTC Training 2013

  23. Qualified Roth IRA Distributions • No additional tax if: • Made after the five-year period beginning with first contribution AND • Made on or after age 59½ OR • DisabledOR • DeathOR • To pay up to $10,000 of certain qualified first-time homebuyer amounts NTTC Training 2013

  24. Roth IRA Distributions • Many payers using code J or T (Code Q is qualifying Roth distribution) • If TP meets rules for qualified distribution, use exclusion worksheet – Line 5 NTTC Training 2013

  25. Roth IRA Distributions NTTC Training 2013

  26. SIMPLE or SEP IRA Distributions • Taxed like Traditional IRA – fully taxable • Premature distribution – additional tax applies (SIMPLE at rate of 25% if box 7 code is “S”) • RMD rules apply NTTC Training 2013

  27. TaxWise Form 1099-R NTTC Training 2013

  28. TaxWise Form 1099-R Impact State tax treatment – read state instructions NTTC Training 2013

  29. Early Distribution – Code 1 • IRA distribution prior to age 59½ subject to 10% additional tax • Some early distributions may be exempt from additional tax – add Form 5329 NTTC Training 2013

  30. Common Form 5329 Exception Codes Avoid additional tax if distribution was: 03 due to total and permanent disability 04 due to death 05 for medical expenses >10% of AGI 07 made for unemployed individual health insurance premiums 08 made for higher education expenses NTTC Training 2013

  31. Pub 5329 Additional Taxes on Qualified Plans • See Pub 4012, page H-2 for exception codes • More in later lesson NTTC Training 2013

  32. Qualified Charitable Distribution • Qualified Charitable Distribution (“QCD”) must be direct from IRA trustee to charity • QCD satisfies RMD requirement • Not taxable when distributed • No charitable contribution deduction • AGI is not inflated! NTTC Training 2013

  33. Qualified Charitable Distribution NTTC Training 2013

  34. “Pension” Distributions • Reported on Forms • 1099-R – company plans • RRB-1099-R – (green) Railroad Benefit • CSA-1099-R – civil service, government NTTC Training 2013

  35. Definitions Pub 17, Ch 10 • Pension: Series of determinable payments made to employee (or survivor) after retirement from work • Annuity: Payments under contract from insurance company, trust company or individual NTTC Training 2013

  36. Interview • With 1099-R in hand – IRA box not checked: • Did taxpayer make non-deductible contributions? • If rollover was made, was it timely? • If disability pension income, is taxpayer under retirement age? • Is taxpayer a retired public safety officer? NTTC Training 2013

  37. 1099-RWhat is this form telling you? NTTC Training 2013

  38. Railroad Retirement 1099-R 2013 1,089.16 1,089.16 -0- -0- 354.00 NTTC Training 2013

  39. Be sure to check Railroad Retirement in TaxWise if applicable NTTC Training 2013

  40. Disability Retirements Code 3 • Until taxpayer reaches minimum retirement age • Disability payments taxed as wages • 1040 line7, eligible for Earned Income Credit • Once retirement age is reached • Disability payment taxed as pension • 1040 line 16 NTTC Training 2013

  41. Entry of Disability – TaxWise • If Code 3 and person on disability but under retirement age, mark box as shown • Amount will transfer to Line 7 Wages NTTC Training 2013

  42. Civil Service Pensions • Same rules as private employer plans • Slightly different form • Box 5 has insurance charges or basis recovered this year • Input exactly as on form • Use simplified method if applicable • Use Public Safety Officer medical if applicable NTTC Training 2013

  43. CSA 1099-R 2013 Insurance premium or basis recovered in 2013 or both NTTC Training 2013

  44. Public Safety Officer Exclusion NTTC Training 2013

  45. Taxable Distributions • Payer reports taxable portion of distribution in box 2a Form 1099-R • Retirement plans are funded by either before-tax or after-tax contributions • Before-tax – entire distribution will be fully taxable • After-tax – distributions partially taxable (box 9b Form 1099-R) • “Taxable amount not determined” checked NTTC Training 2013

  46. Taxable Distributions • Two methods used to figure taxable portion • General Rule – Out of Scope • Simplified Method • Pub 4012 (Page D-20), 1099-R Exclusion Worksheet NTTC Training 2013

  47. Simplified Method • To calculate you will need: • Cost in plan (box 9b Form 1099-R) • Age – taxpayer’s age on date annuity began • and spouse’s age if joint/survivor annuity is selected • note if annuity starting date is before or after taxpayer’s birthday for that year NTTC Training 2013

  48. Simplified Method • To calculate you will also need: • Total of tax-free amounts from previous years – available from the taxpayer’s prior year worksheet • Check previous year amounts (whether taken or not) to assure total cost recovery has not occurred NTTC Training 2013

  49. Simplified Method – Single Annuitant NTTC Training 2013

  50. Simplified Method – Joint Annuitant NTTC Training 2013

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